Explaining Regulation: What supports the regulating?

Understanding Regulation: Theory, Strategy, and Practice (prt.2)

Explaining Regulations

More often, however, life will not be that simple, and different aspects of a regulatory development will resonate with different regulatory theories.

1. Public Interest Theory

Those seeking to institute or develop regulation do so in pursuit of public interest-related objectives (rather than group, sector, or individual self-interests). Proponents of regulation are thus seen as acting as benevolent agents for the public interest. It incorporates a vision that implies a highly benevolent view of political processes. The ‘public interest’ world is a world in which bureaucracies do not protect or expand their turf, in which politicians do not seek to enhance their electoral or other career prospects(this is a world of few transaction costs and institutional biases).

• A first difficulty is that an agreed conception of the public interest.
• A further problem stems from doubts concerning the disinterestedness, expertise, and efficiency that the public interest approach attributes to regulators. Regulators, in the alternative, may be accused of tendencies to act in pursuit of their own institutional ends by protecting and expanding their jurisdictional turf.
• Public interest theory understates the degree to which economic and political power influences regulation.
• Regarding results, the public interest perspective is prone to attack on the basis that regulation often seems to fail to deliver public interest outcomes.

Stephen Breyer suggests that it is useful to maintain a normative approach that considers ‘what reasonable human goals a program might sensibly have, regardless of its historical origins.

2. Interest Group Theory

The extent to which regulatory developments are driven by the particularistic concerns of interest groups. This approach has most prominently been associated with the so-called ‘economic theory of regulation’. The economic theory of regulation builds on the assumption that actors are inherently self-regarding and orientated at maximizing their own (material) interest.

2.1 Strict Interest Group

George Stigler suggested that: ‘as a rule regulation is acquired by the industry and is designed and operated primarily for its benefit’. Accordingly, regulation is inherently about (degrees of) ‘capture’.

Ｗhere there is a failure of competition, or the existence of monopoly, there will be monopoly profit and the legislature will give the regulator the power to dispose of these economic monopoly rents. The regulated industry thus will have an incentive to influence the regulator so as to benefit from a ‘regulatory rent’, and there will be a market for regulation. This means that the regulator will be captured by the industry, since industry will have more to lose or gain than the regulator.

Further contrasts have been drawn between the assumptions of the Chicago school of law and economics — that legislators and regulators seek to maxim- ize their personal wealth — and the position of the ‘Virginian’ school of political economy, which sees legislators and regulators as pursuers of ex- pected votes or ideological ends as well as cash, and which gives greater prominence to the interplay of pressure groups.

2.2 Wider Interest

This set of interest-group theorists sees regulatory developments as the products of relationships between different groups. Such theorists see regulatory behaviour as a competition for power.

Bernstein offers a ‘life cycle’ version of regulatory processes. The theory points to a variety of forces (internal and external) in accounting for a regulatory trajectory that is characterized by an ageing process in which an initial ‘public interest’ regulatory regime gives way to capture by the regulated industry.

1. Regulation typically begins as a policy response to a political call to protect the public from undesirable activity.
2. In the first of four stages of life , concerns about a problem result in the creation of a regulatory body.
3. Inexperienced regulatory body is outmaneuvered by the regulatees but operates with a crusading zeal.
4. Regulation becomes more expert and settled, but as the agency moves out of the political mainstream it begins to pay increasing attention to the needs of industry.
5. The agency relies increasingly upon precedent when taking decisions, and adopts a reactive stance.
6. Resort to ever more judicialized procedures, and the agency giving priority to industrial rather than public interests.

In general, Bernstein points to the role of regulators in carrying out missions that legislators have negotiated between interest groups, consumers, businesses, and other affected parties — missions that effect compromises but are seen by participants, nevertheless, to be endeavours in pursuit of the public interest.

3. ‘Power of Ideas’ Explanations

For Derthick and Quirk, for example, regulatory reform in the US was one product of a change in intellectual climate that emerged from the spheres of economics, consumerism, and law. Deregulation, as seen in the United States in the Reagan era, was driven not by interest-group pressures but by an intellectually guided process of economic rationalism that managed to benefit dispersed consumer groups at the expense of concentrated producer interests.

the widespread acceptance of regulation’s vulnerability to ‘capture’ led to the conscious design of mechanisms to reduce the possibility of capture. In other ways, also, the diagnosis of capture changed the intellectual climate and resulted in changes in regulatory approaches.

Although ‘deregulation’ is widely (and paradoxically) said to have resulted (across national contexts) in the growth and extension of explicit regulation across domains (utilities, social, and environmental regulation), the impor- tant contribution of the ‘ideas matter’ analysis is to suggest that the wider intellectual climate significantly shapes the type of regulatory instruments and institutions that are regarded as desirable.

the important contribution of the ‘ideas matter’ analysis is to suggest that the wider intellectual climate significantly shapes the type of regulatory instruments and institutions that are regarded as desirable.

Peter Hall has suggested that economic policy can be understood as a three-level system in which policy instruments and programmes follow broad economic policy paradigms.45 In other words, the rise of the regulatory state (discussed in Chapter 20) and regulatory reform movements can be understood as responses of wider economic policy paradigm changes away from the ‘welfare state’ — or what has controversially been defined as shift from ‘Keynesianism’ to ‘Monetarism’.

The rise of the regulatory state can be understood as responses of wider economic policy paradigm changes away from the ‘welfare state’(Keynesianism) to ‘Monetarism’.

Strains of ideas matter:

1. ‘Ideas matter’ strain thus stresses the importance of the wider intellectual and political climate in shaping regulation.
2. The second strain concentrates more on the implicit theories inherent in particular regulatory approaches. In short, at the heart of any regulatory intervention is a particular ‘core idea’ about the nature of the world; and therefore they are advocated by those that share these ideas.
3. The third strain emphasizes the importance of deliberation and conversation. This ‘argumentative turn’ follows Habermas and points to the importance of interpretative communities that are supposed to deliberate and come to shared understandings regarding the regulatory issues and processes.

One dimension — called ‘grid’ — defines the extent to which individual behaviour is bound by rules; the second dimension — termed ‘group’ — defines the extent to which an individual regards herself as being embedded within group processes.

In sum, the ‘power of ideas’ approach ranges from a focus on

• the underlying ideas that drive the designs of regulatory instruments
• a stressing of the importance of the broader intellectual climate that shapes regulatory instruments
• an emphasis on understanding the deliberations and discourses, the interactions and communication patterns that operate within regulatory domains and structure regulatory actions.

It is a broad approach that might have difficulty in

• explaining why certain ideas take root
• how ideas can be separated conceptually from interests
• in accounting for the patchiness of ‘deregulation’ (which has led observers to prefer the term ‘regulatory reform’).

In so far as it is conceded that ideas possess a force of their own, however, the ‘power of ideas’ accounts

• do qualify the economic theory of regulation’s emphasis on the market as the key factor in understanding regulatory progressions.
• emphasize the importance of plural rationalities in shaping regulation and they highlight also the prevalence of fads and fashions in regulatory politics (and possibly also in scholarship).

4. Institutional Theories

Institutionalism has become such a broad church that it is hard to find anyone who would not claim to be an institutionalist.

4.1 Inter-institutional relations

This literature asks how institutions can be designed to provide for benevolent outcomes and avoid widely diagnosed pathologies of regulation.

Regulatory control is inherently limited, and this limitation applies in two ways. One relates to the political control of the regulatory agencies to whom politicians have delegated the oversight functions. The other dimension of limited control is that of the regulatory agency over the regulated industry (as would be identifiable as ‘capture’).

The institutional design literature has provided for a range of tools to deny the universal applicability of the ‘bureaucracy out of control’ charge.

Bringing these different literatures together in a comprehensive treatment of the institutional design literature, Murray Horn points to four dimensions that direct (legislative) decision-makers in choosing institutional forms.66 Decision-making costs are the opportunity costs incurred by those taking political decisions (in Horn’s case, legislators). The higher these costs are, the more likely it is that delegation will occur. Commitment costs are the potential costs that a future generation of policymakers will be likely to incur in reversing an initial decision. Agency costs are the expenses involved in monitoring a regulatory authority. The higher these are, the less likely it is that a delegation will be made. Finally, uncertainty costs arise from the genuine uncertainties that programmes will occasion and which will impact on alloca- tions of benefit flows among affected constituencies.

no simple ‘one size fits all’. Instead, institutional design is inherently a political choice that reflects the constellations of a particular context.

4.2 Intra-institutional relations

This strain sees regulatory change as driven by forces that come from within organizations. Regulation is limited, if not inherently about non-control. Four particular lines of enquiry that emphasize this particular strain of regulatory thinking can be distinguished:

4.2.1 institutional layering

a very traditional interest in the study of organizations, namely how organizations and rule-systems respond to changes in their environment

4.2.2 perversity

related to ideas that focus on competing logics and incremental adaptation. They stress the limits of intentional action. Regulation, therefore, is at least as much about unintended consequences as about intended outcomes

Sam Sieber, for example, though not writing about regulation directly, pointed to seven reverse mechanisms that would pervert intended action — and all of them have direct implications for the study of regulation.74 Sieber’s seven mechanisms are:

• functional disruption: where regulation frustrates the functioning of the system, thereby worsening the overall outcome;
•  exploitation: where opponents succeed in achieving the opposite of the intended effects;
• goal displacement: where the process of regulating drives out the overall objective of regulating;
•  provocation: where opposition and antagonism are mobilized, rather than compliance achieved;
•  classification: where labelling effects have reverse effects, such as when attempts at stigmatizing behaviour become badges of honour;
•  over-commitment: where the resource intensity of seeking to achieve unob- tainable objectives reduces the resources to achieve obtainable objectives;
•  placation:wheretheillusionofregulatorycompliancedistractsfromdanger signals.

the key interest has largely lain in the biases and worldviews that are incorporated into regulatory instruments and ‘styles’. Cultural theory, how- ever, also points to potential limitations of each approach which are largely generated through exploitation

4.2.3 self-referential

involves an understanding of society that is increasingly differentiating into subsystems that are shaped by their own codes (hence the biological metaphor of ‘autopoiesis’). Each subsystem (law, economy, politics, religion, etc.) is seen to have its own rationality, yet to be able to react with its environment so as to self-generate and reproduce.Communication rather than any theory of action is at the centre of these accounts.

In general, accounts stressing autopoiesis or self-referential systems suggest that hierarchy is dead and attempts at ‘coupling’ different systems are problematic. Therefore, regulation is most likely to be ineffectual. Regulation is replaced by evolution. Indeed, rather than simply stressing failure, the emphasis is on the non-instrumental character of knowledge and meaning.

To summarize, ‘intra-institutional’ accounts lay special stress on endo- genous processes that encourage regulatory change and adaptation.

4.3 Network Theories and Regulatory space

This mixing of regulators and strategies may be necessary and desirable.

This house points out that, in reality, many risks and social or economic problems are controlled by networks of regulators. Governments frequently have to spread enforcement and policy- making powers across agencies.It may be useful to mix command and control methods with other regulatory instruments, such as incentives that operate through trading mechanisms or taxation laws.

Control by means of a typical network might, thus, involve a government department legislating in accordance with supra-national legal requirements, a number of regulatory agencies applying a variety of regulatory instruments, some standard-setting authorities, a professional self-regulator, a large number of local and police authorities, and a diversity of voluntary bodies, regulated corporations, and other organizations.

Network analysis also suggests that quite distinctive responses to coordination challenges can be identified, notably:

• resort to hierarchies and rules;
• use of network management strategies;
• reliance on collaboration through exchanges and markets;
• procedural or institutional structuring

The network approach highlights the importance of appreciating the extent to which modern regulation is decentred and how many regulatory regimes are made up of numbers of institutions with characteristics that diverge across a host of dimensions.

Analyses of regulatory change, on such a view, have to take on board the ways that different forces— whether internally or externally generated—may impact quite differently across the numerous organizations, cultures, and processes that, together, constitute the regulatory regime.

These recent network accounts also relate to the well-established and long- standing ‘regulatory space’ account, initially put forward by Leigh Hancher and Michael Moran.

The ‘space’ here is conceived of as a cluster of regulatory issues, decisions, or policies (a ‘regulatory arena’) that involves the interplay and competition between various interests.

In the world of regulatory space, the idea of ‘capture’ makes only limited sense; regulatory authority is inherently shared, and private interests are driven to, or accept, playing legitimate roles in the regulation of themselves, of industry sectors (through associations), and of wider society.

It faces considerable problems in accounting for the boundaries of regulatory spaces and in explaining the different dimensions that characterize the ‘topology’ of the space—notably: the relative power of the different actors; the distribution of resource dependence relevant to the space; and the nature of the communication flows between actors.